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Japan Intervenes Overnight; Dollar Stronger but Stocks and Bonds Uncertain

U.S. Stock futures and Treasury instruments are trading lower overnight following an intervention last night by Japanese officials. On Tuesday, stocks rallied on better than expected U.S. Retail Sales and Business Inventories reports which showed the economy was growing but at a slow pace. Overnight stocks are under pressure but the action has been light as traders seek direction after the intervention.

It is possible that the Japanese intervention will have no effect on equities which means the emphasis will shift to today's economic reports. Today investors will be focusing on U.S. industrial production which is expected to rise for the third straight month and the New York Federal Reserve's Empire State index for September which is also forecast to show a pick-up in factory activity

Like Tuesday's action, the Dollar may weaken on both good and bad economic news. For example, better than expected data may be interpreted to mean that the global economy is back on track. This could trigger a sell-off in the Dollar as traders will weigh the strength of other economies versus the strength in the U.S. In addition, weaker than expected data is also likely to put pressure on the Dollar for the same reason. It seems at this time that traders will only be willing to buy the Dollar under flight to safety conditions.

Overnight Japanese officials intervened to weaken the Yen in order to protect the country's export market. Traders are still trying to sort out what this means. Some feel that the Japanese overreacted to what they perceived as excessive volatility. This may mean some sort of retaliation plays in the currency market to counter the effects of the weaker Yen and the stronger Dollar. At the same time, traders may be looking for acknowledgement by other central banks that the Japanese did the right thing.

Last night's intervention was Japan's first since 2004. While it seems to be an aggressive move at a time when the global economic recovery is trying to stay on track, some traders feel that the move will not be enough nor sustainable and that the Yen is destined to move higher over the near-term. Last night's trading action may be just a knee jerk reaction to the intervention. Once the market calms down, the uptrend in the Yen may resume.

Tuesday Recap

Despite the friendly retail sales and business inventory reports, December Treasury Bonds continued the rally which began on Monday after the market finished its correction of the 124'22 to 135'19 range when it found support at the .618 level at 129'11.

The current chart pattern suggests that a retracement to 131'24 is likely. This price forms a resistance cluster with a downtrending Gann angle at 131'27. This cluster is very important on Wednesday. Selling pressure could come in; triggering a short-term break or the market can accelerate to the upside over this zone.

What the current chart pattern is suggesting is that the market just finished a correction. This assumption can be made because we know that the Fed has been buying T-Bonds and are likely to continue to do so. How do we know this? Because the Fed told us at its August meeting that it would be buying T-Bonds.

Like it or not, the Fed is now an investor and has the capability to move a market. This means that like an investor, the Fed may not want to chase the market higher, but instead wait for dips and pullbacks into value areas. After the Fed's announcement in August, T-Bonds went on a tear. The Fed was not looking to chase the market higher, so it most likely opted to wait for a pull-back. Paying too much for an investment would have hurt the Fed's strategy.

The conclusion that can be reached is that T-Bonds were boosted by the increased amount of government debt that the Federal Reserve will buy in the coming weeks. According to Reuters, a report from the central bank on Monday said the Fed plans to buy about $27 billion of Treasuries starting later this week to early October. This is $9 billion more than its initial round of government debt purchase that began in August.

If the Fed is aggressive tomorrow then the market is likely to break through the resistance zone at 131'24 - 131'27. If the Fed deems this price too expensive, then look for selling pressure to trigger the start of a short-term break.

Stocks surged to the upside on Tuesday after a small profit-taking break overnight, driven higher by a better outlook for the economy. Appetite for higher risk assets increased, following better than expected U.S. retail sales and business inventory reports.

For a few days, I've been talking about the possibility of a rally and that the key was whether U.S. investors would chase this market higher or wait for a dip. Today's action was a strong sign that U.S. market players continue to prefer buying breaks over buying strength.

Tuesday's rally in the December E-mini S&P 500 stopped short of the breaking out over a pair of tops at 1122.00 and 1124.50. The December E-mini Dow was in a position to challenge the August 9 main top at 10614. The December E-mini NASDAQ remained the strongest after breaking the swing top at 1918.00. The new target is the June 21 top at 1941.00.

The upside momentum the past few days has been impressive, but there is still much debate as to whether these markets are still in a range.


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